Bedraggled backpackers journeying across a foreign country on a voyage of self-discovery come to mind when you mention the word “hostel”. But the memories conjured up by those who last used such accommodation a decade ago or more would scarcely match the new reality.

Hostels are undergoing something of a revolution in response to a major shift in travel habits. Millennials travel more frequently than their parents did, are more demanding of value and, above all, they prioritise “experience”. At the same time, families are looking for better alternatives to hotels.

A land grab is under way to meet that demand. London now boasts the world’s only listed hostel owner in Safestay while hotel groups such as Hilton and Accor have also positioned themselves to take advantage of the sector’s growing popularity.

The desire for experience – for connecting with real people in a particular city – partly explains the ballooning of the private rented accommodation sector, thanks to the likes of Airbnb. The hostel, its proponents claim, can do exactly the same thing by providing communal areas for guests to interact at properties which are in the heart of cities but don’t cost a fortune for rooms. They also offer individual rooms as well as dorms and several options in between, enlarging their potential customer base.

Larry Lipman, chairman of Safestay, spotted the opportunity early on when his company launched its first site in Elephant and Castle in 2012. “We’ve opened up the accommodation market like easyJet did with budget airlines,” the South African property expert said. “While the traditional hostel customer would be aged about 17-20, our hostels cater for groups and it’s common to find a complete cross-section of customers, from parents and families through to business travellers.”

Safestay has carved out a niche for itself by targeting statement buildings, including its Holland Park site which is in a Grade II-listed building. “It’s all about location, location, location,” he says, “and once you have that right you sell it for free.” The average price of a bed across the firm’s 11 sites is £20 ($35) – “you could pay more than that for breakfast around here in Holland Park”, Lipman said.

Lipman’s Safeland business not only spawned Safestay but also storage company Safestore, which was bought by private equity firm Bridgepoint for £294 million ($507 million) in 2003, after Lipman had sold his stake. His knack of identifying property trends, therefore, has credibility and he is confident about Safestay’s future plan to hit 20 sites soon.

“I feel fairly confident that, in hindsight, the timing for the launch of the business will have been perfect,” he said. “When others come to the market it heightens awareness of hostels and hotel groups are looking at it which I think will make the exit strategy for investors exciting. Providing we keep the brand pure I anticipate one of the big hotel groups will probably pay for the business.”

Whether a buyer comes calling or not, it’s difficult to argue against growing interest in the sector by major hotel giants following in the path trodden in the UK by Safestay, as well as in Europe by German hostel operator Meininger, which has 17 sites now but plans to have 40 in four years.

French hotel giant Accor launched its Jo & Joe brand last year in the French town of Hossegor and will expand into 50 sites by 2020 including London, Liverpool, Glasgow and Edinburgh, as well as across mainland Europe. The brand is pitched as a blend of private-rental, hostel and hotel with room rates from €25 ($38) a night.

Matthieu Perrin, director of the company, says he would not necessarily classify it as a response or reaction to Airbnb but noted a “correlation” in approach in terms of serving the demands of today’s travelling community. “We know the millennial travels roughly four times more than their parents’ generation but their budget hasn’t increased four times and so they don’t travel in the same way,” he said.

“They want something different, an experience as opposed to a hotel room in which sometimes they can feel alone. They want to meet people.”

Another key demographic the hostel is addressing is the family. This is something the private rental sector has been aware of and used to its advantage against the hotel, which seldom has rooms big enough for families and lacks adjoining rooms.

“We don’t want to address the fringe of the market,” Perrin said. “Our pilot site was in a location popular with 20-something surfers but we had lots of families too because they felt safe and the atmosphere was inclusive.”

While the trend is burgeoning in the UK and Europe, the US is playing catch-up. Christopher Nassetta, Hilton’s chief executive, is planning what he describes as an urban micro-brand – in effect a hostel – with rooms of between 125 to 150 sq feet with an emphasis on “connectability, flexibility and a local vibe”. It is likely to launch next year as investor activity in the sector cranks up in America.

At present, the US has roughly 3 per cent of worldwide hostel properties and 10 per cent of the sector’s revenue compares to 28 per cent of global hotel revenue. It’s going to need much more activity to increase this percentage given the move earlier this year by the UK’s Queensgate Investments, a real estate private equity manager, to snap up Generator Hostels from Patron Capital for an enterprise value of €450 million ($686 million).

The Mayfair-based buyer pledged to invest “no less than €300 million ($233 million)” in the 14-site hostel company with an aim of targeting the “fast-growing sector of millennial customers”.

Russell Kett, chairman of hospitality consultancy HVS, says while the hostel sector had been slow to gain the support of the major hoteliers, “they are all looking at it in one shape or another”. He said: “The multi-bed dorm is attracting a much broader market than the typical backpacker than would have been the case five, 10 or 15 years ago. This includes retired people who are now often travelling in groups of two or three couples and are opting to share dorms because it is better value for money.”

On the Generator Hostels deal, Kett said Queensgate Investments was a “serious investor” and that its interest in the hostel sector was a noteworthy development. He said the emphasis for Generator’s new owners would likely be providing a hostel that draws on some elements of a traditional hotel while emphasizing the social aspect. “Interest in hostels is very much driven by the fact people are looking for a greater experience and meeting like-minded people,” he added.

He was also more circumspect on the rise of the hostel as a response to the likes of Airbnb. His view is the trend is driven by social media because guests are perhaps more likely to share an experience of meeting locals, something which is encouraged in hostels’ communal settings but less so in hotels.

Kett is sure we haven’t seen the last of big brand involvement. “It won’t be too long before the likes of Marriott and others are doing this as they all want to ensure they have a brand for every type of traveller,” he said.

Navneet Bali, chairman of Meininger, says it had signed a deal in 2014 with the largest hotel investor in Europe – Fonciere de Regions, based in France. He believes this has “further enhanced” their growth prospects and was part of the reason behind Accor and Hilton’s interest in the market.

“In addition, large international funds such as TPG and others have made plans to invest in this sector and are seeking acquisitions,” he added.

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